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  • BMO Capital Markets' Andrew Kaip Says Get Ready For The Consolidation Wave

    Andrew Kaip, managing director of mining equity research at BMO Capital Markets, says the stark reality is that the precious metals sector is only part way through a down cycle and that structural issues will result in a fresh phase of consolidation. He adds that the small to intermediate producers will lead the consolidation charge. In this interview with The Gold Report, Kaip suggests some suitors and prime acquisition candidates.

    The Gold Report: In late November, BMO Chief Economist Doug Porter warned that interest rates could move higher sooner rather than later in 2015. What's your 2015 outlook for gold given that information?

    Andrew Kaip: Our 2015 outlook for gold is that it will trade, broadly speaking, where it is today. Our assumption for next year is $1,190 per ounce. Do we look to Doug Porter's view on interest rates rising and that potential? We do. If the market perceives inflation is becoming a concern, we see that as constructive for the gold price.

    TGR: You have extensive experience covering junior gold companies. In your time as an analyst did anything prepare you for this cycle investors are witnessing?

    AK: When we look at what has changed over the last couple of years, I think that in general BMO Research understood that the direction was changing. Several years ago we began putting out reports cautioning investors that metal prices had downside risk and we were concerned with structural issues in the sector that continue to play out. And while we certainly understood the direction, I don't think any of us fully understood the magnitude of the shift.

    TGR: Do you now have a better understanding of where we're headed?

    AK: Metal prices have lost roughly one-third of their value compared to where they were in a peak price environment-even more for silver. If we step back and think about a cycle and how a sector moves from bull to bust, I would say we're really part way through the consolidation that takes place when a sector is out of favor and has to deal with structural issues. That's difficult to hear, but I see the gold space moving through a down cycle. We had a good run from 2010 through 2012, but we're now in a consolidation phase, with the risk of lower precious metals prices.

    TGR: There have been casualties along the way. What are you telling your team?

    AK: We've always been realistic. Our focus over the last two years has been to steer clients toward mining companies that have strong management teams managing quality assets and building them into stronger businesses.

    TGR: You suggested earlier that there are structural problems in the precious metals space, especially among the smaller companies. Could you give us some examples that help illustrate your point?

    AK: There are a number of issues that we have focused on. The first is that the operating cost structure for a number of companies is not structured for today's metal price environment. We are looking closely at smaller companies and some larger companies to see how they're responding to lower metal prices. They started by cutting discretionary spending, but now companies are looking more closely at sustaining capital in an attempt to reduce their overall cost structure and maintain profitability. But if you take too much sustaining capital out of the business, how is that going to impact the business in two or three years?

    TGR: One hot topic on cutting costs is executive compensation. Has it become unrealistic?

    AK: In the context of this current market there needs to be a healthy discussion as to what is appropriate compensation for executive teams. In some instances, levels of compensation are significant relative to a company's production. One thing that our clients are telling us is that they would prefer to see the old business model where executive teams had significant ownership of the companies that they were running. They benefited from their success through share price appreciation. Investors want management aligned with their interests.

    TGR: Is there a tangible way investors can determine what is reasonable and what's excessive?

    AK: If a management team has significant share ownership-an amount at least comparable to their base salaries-then investors should begin to feel comfortable that those individuals are trying to create wealth and make decisions that will benefit all shareholders.

    TGR: What is your view on high grading?

    AK: The reality of lower metals prices, particularly in the precious metals space, is that companies have to move toward higher grade to maintain profitability. But that comes at the expense of reserve life. We saw that at the beginning of 2014, but our expectation is that we will see further declines in reserves when reserves are restated at the beginning of 2015. For some companies, that's going to precipitate a decline in reserve life to the point where it could become motivation for consolidation. Some of these companies will have to look to acquire smaller companies with new projects in order to maintain their production profile. In fact, some of these companies are going to have to look at consolidation if they are going to continue operating.

    TGR: That is going to place greater importance on exploration.

    AK: Exploration is an important aspect of regeneration in mining. Consolidation is really a short-term way for these companies to get out of their current predicament. If we take a longer-term view, exploration has been key to companies reinvigorating existing mines by expanding reserve bases over time. We're not seeing exploration at the level we think it needs to be to replenish reserves in today's market. That's why we think consolidation in the short term has the potential to take hold. And that's constructive from an investor standpoint.

    This sector needs to go through a consolidation to create stronger mining companies-and consolidation allows companies to grow their reserve bases and operational flexibility. Then we can look toward a future where investors will want to begin investing in exploration companies again for the prospect that they might make impactful discoveries.

    TGR: What is consolidation going to look like in 2015?

    AK: Consolidation makes for an interesting discussion. For example, David Haughton, our senior precious metals analyst, says that many of the senior producers he covers are not in a position to acquire and that only a handful have a mandate for acquisition. Our view is that we're not really going to see the large mining companies participate in a round of acquisition. Mergers and acquisitions will mostly be the domain of the small to intermediate gold and silver producers.

    TGR: Will consolidation come in the form of cash-and-share deals?

    AK: Cash is scarce in this sector. If a company is going to make an acquisition, it is going to make an acquisition primarily with shares. One of the biggest questions for junior companies right now is cash. There is an ongoing debate among exploration company management teams: Are shareholders better off in a larger entity that has the means to develop its assets or are shareholders better off sticking it out in the current environment and hoping for better days?

    TGR: In other interviews you have suggested that investors should stick to outliers in the gold space. Please describe an Andrew Kaip outlier.

    AK: Outliers are those companies that we believe are well run. They have quality assets that can generate cash at current metal prices or lower. They have management teams that are well regarded, are technically strong and make decisions in the best interest of shareholders. Often those management teams are significant investors in their companies, too. That's the combination we're moving toward.

    TGR: What are some examples?

    AK: We view Franco-Nevada Corp. (NYSE:FNV), a royalty company, as an outlier. In the silver sector, we look toward Tahoe Resources Inc. (NYSE:TAHO) as an outlier given its strong management team, high-quality assets and significant management ownership of the company. These are the leaders of our industry.

    TGR: Franco Chairman Pierre Lassonde says his company is very much undervalued. Is he correct?

    AK: David Haughton, our senior analyst who covers Franco-Nevada and who has covered royalty companies for a long time, noted recently that over the last couple of years valuations of royalty companies have come down significantly relative to those of precious metals producers. In that context, Pierre is absolutely correct.

    TGR: Tahoe was among three "flight to quality" recommendations in a recent BMO report on the silver sector. The other two names were Fresnillo Plc (OTCPK:FNLPF) [FRES:LSE] and Silver Wheaton Corp. (NYSE:SLW). Why did Tahoe make your short list?

    AK: Tahoe made the short list because it has asset quality that's comparable to Fresnillo, a London-listed silver company with operations in Mexico. Fresnillo is a high-quality operating company with first-quartile cash operating cost mines that are run with a conservative approach toward execution-good execution. Tahoe doesn't have the depth of assets that Fresnillo has, but it certainly has a primary asset that will be the company cornerstone for many years to come.

    I put Silver Wheaton in that group because Silver Wheaton is a precious metals streaming company, a naturally defensive name. Any royalty company carries some operational risk from the standpoint of production from its underlying streams or royalties, but royalty companies don't deal with the capital or operating cost escalations that mining companies incur. All three companies, in the context of value relative to their peers, are more attractively priced.

    TGR: Tahoe President and CEO Kevin McArthur just cashed in several tranches of shares worth about $10 million. Should that give potential investors pause?

    AK: Investors are always asking why management teams do what they do, but most investors who have been following the story realize that Kevin has had a decent amount of his capital tied up in Tahoe for a number of years. From my discussions with the company, it sounds as if there were personal reasons for Kevin to sell those shares but he's still a significant Tahoe shareholder.

    TGR: Do investors go with an exchange-traded fund like the SPDR Gold Trust (NYSEARCA:GLD) or with companies like Franco and Silver Wheaton?

    AK: The one advantage that Franco and Silver Wheaton have that the SPDR Gold Trust or even holding precious metals doesn't is that both companies have portfolios where significant discoveries can still be made. It's those significant discoveries and the crystallization of that value creation that distinguishes them from holding a basket of equities or the underlying metal.

    I cover Silver Wheaton and investors are starting to understand that a couple of the streams that Silver Wheaton owns are beginning to add value that they had not considered. For example, Goldcorp Inc. (NYSE:GG) is considering adding another processing circuit at its Peñasquito operation in Mexico. That would amount to another 1 million ounces of silver annually. Another example is the impending expansion of Vale S.A.'s (NYSE:VALE) Salobo copper mine in Brazil, where Silver Wheaton owns 25% of life-of-mine production. Salobo is already producing at a higher rate than what was originally expected, something that when Silver Wheaton acquired that stream investors had completely discounted. Over time royalties can grow from a reserve perspective, but they can also grow from a production perspective. That's the advantage that both Franco and Silver Wheaton bring to the table.

    TGR: You provided the basics of your current investment thesis for gold and precious metal equities. Is there anything you would add?

    AK: We've been talking to investors about what they want and that is highly leveraged names. We much prefer investors take into consideration financial leverage versus operational leverage. Operational leverage is looking for high-cost miners. If you invest in high-cost miners, you could see a significant return if metal prices rebound rapidly. But we tend to find that the high-cost operators continue to be high-cost operators because once metal prices begin to rise, those high-cost miners have to reinvest capital in their operations because they've been starving them to maintain profitability.

    Most of the financial leverage in the gold sector today is long-dated financial leverage. For investors, that's a lower-risk profile because they don't have the prospects of debt renegotiation and uncertainty. Investors are looking at decent quality assets that are hampered in the current market by debt. Once metal prices move higher, investors can add significant value with lower risk.

    TGR: What are some companies you're tracking at the top of the precious metals food chain?

    AK: The biggest question with the senior producers right now is direction. The market is looking for the seniors to map out a strategy. Many are working on those strategies, but not all of those strategies are coming in a timeframe that investors favor. Investors are gravitating toward seniors with coherent strategies like Goldcorp, Agnico Eagle Mines Ltd. (NYSE:AEM) and Randgold Resources Ltd. (NASDAQ:GOLD).

    TGR: Where is the primary growth going to come from in those three names?

    AK: Goldcorp is ramping up to commercial production at two mines-Éléonore in northern Quebec, and Cerro Negro in Argentina. That amounts to significant production growth. Agnico, of course, joined forces with Yamana Gold Inc. (NYSE:AUY) to acquire Osisko Mining. Agnico just went through a round of consolidation that has resulted in production growth but Agnico is a company with a mandate for further acquisitions. It's been specific about what it's looking for and we expect it to be looking for new opportunities.

    TGR: What are some names in the midtier or small producer category that should participate in the next round of consolidation?

    AK: A number of intermediates are quite acquisitive. Some of the names we expect to lead future consolidation of the sector include B2Gold Corp. (NYSEMKT:BTG), which has been very active on the acquisition front; Primero Mining Corp. (NYSE:PPP), a name that we cover that has been acquisitive; Rio Alto Mining Ltd. (NYSE:RIOM), which acquired a junior company earlier this year and that was viewed as a sound acquisition; and Argonaut Gold Inc. (OTCPK:ARNGF) [AR:TSX], which has grown through acquisition and will likely do so again.

    TGR: Rio Alto climbed well above $3/share in September as rumors of an impending takeover carried the share price higher. Were those rumors unfounded?

    AK: They're never unfounded, but during that period Rio Alto was consolidating its Sulliden Gold acquisition. Once investors understood what the acquisition was all about, we started to see the share price appreciation. Sometimes a well-timed acquisition, even though investors aren't expecting it, can really reinvigorate a company's prospects.

    TGR: Primero increased production at Black Fox by 30% in Q3/14 versus Q2/14, but the mine still requires capital improvements that will likely siphon money away from the development of Primero's Cerro Del Gallo project in Mexico. Is Black Fox worth it?

    AK: When we look at Black Fox there is a large capital requirement and a longer runway to get that project to where Primero wants it to be. Primero is committed to moving that project forward and there are very good indications that the mineralized structures that host gold at Black Fox continue at depth. Brian Quast, the intermediate analyst here at BMO, would point out that the real driver for Primero at this point is very much San Dimas and the growth opportunity there.

    TGR: Another company you listed, B2Gold, has received some criticism for some recent takeovers but consensus on the Street seems to be that the Papillon Resources Inc. (OTCPK:PAPQF) acquisition will be accretive. Your thoughts?

    AK: That's our view. The Papillon Fekola gold project in Mali is a good quality asset. It provides increased geographic concentration for the company and certainly has the potential to be an accretive acquisition.

    TGR: What about the developers and explorers?

    AK: There are some interesting themes taking place in the junior space. We have a lot of data from junior takeovers dating back to the mid-1990s. One thing that is apparent is that the actual value of junior companies [using enterprise value per ounce of reserves] has never been cheaper-even in the context of today's gold price. We see a number of junior companies with credible assets that will be developed at some point and those companies are going to be acquisition targets.

    TGR: What are some likely names?

    AK: Guyana Goldfields Inc. (OTCPK:GUYFF) [GUY:TSX] is building the Aurora gold project in Guyana. Quite a number of junior companies offer good opportunities. I believe we're moving to a stage where consolidation will be well received by investors.

    TGR: Leave us with one thought that precious metals investors can chew on.

    AK: One thing that I believe has been forgotten is that smart business decisions by both mining companies and junior exploration companies are at the heart of opportunity for investors in this sector. For instance, it was a smart decision by the management team at Aurelian Resources Inc. to say that its shareholders would be better off in Kinross Gold Corp. (NYSE:KGC), a larger entity. A lot of value was created for shareholders through that deal. Did political issues sideswipe the project over the last couple of years? Absolutely, but from a junior perspective that was a wise decision for Aurelian shareholders. The sector needs to get back to the key principles of opportunity. One of them is a healthy transactional environment for precious metals companies. That requires acquirers to see that they can make acquisitions that are accretive to their businesses, as well as junior company management teams that see acquisition as part of their business strategy. We've diverged from that. My hope is that we'll move back into an environment where value can be created for shareholders.

    TGR: Thank you for your insights, Andrew.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Andrew Kaip is managing director of mining equity research at BMO Capital Markets. Previously, he worked as a mining analyst at Haywood Securities, most recently covering gold and silver junior exploration and mining companies. Prior to that, he served as a project and consulting geologist for more than 10 years. Kaip received his Bachelor of Science in geology from Carleton University and his Master of Science in economic geology from the University of British Columbia and is a professional geologist.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Guyana Goldfields Inc., Silver Wheaton Corp., Tahoe Resources Inc., Primero Mining Corp. and Argonaut Gold Inc. Goldcorp Inc. and Franco Nevada Corp. are not associated with The Gold Report. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Andrew Kaip: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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  • John Williams: A Downhill Run For The Dollar In 2015

    Rosy GDP numbers may have cheered the masses, but John Williams of ShadowStats.com says we're a long way from prosperity. In this interview with The Gold Report, Williams debunks the myth of economic recovery and warns that we still have serious debts to settle. That is why he is recommending caution in 2015 to preserve purchasing power and maintain your standard of living.

    The Gold Report: Your hyperinflation report predicted 2014 would be dominated by economic distress, financial crisis and panics. Were you surprised by the performance of the economy this year?

    John Williams: No, at least not in terms of the actual performance. We're getting some fantasy numbers, which I'll be glad to address. The economic distress continued. If we look at the consumer conditions, generally median household income has continued to be stagnant at a low level of activity, below where it was in 1967 as adjusted by the Consumer Price Index [CPI]. Even though the gross domestic product [GDP] supposedly rebounded in mid-2009-it's 7% above where it was before the recession started in 2007-there's very little that confirms that.

    If the individual consumer is not out there buying, we don't have good activity in the bulk of the U.S. economy. Over 70% of the GDP is tied to personal consumption expenditures, and another couple of percent on top of that is tied to residential investment. If we don't have positive inflation-adjusted growth in income-I'm talking actual household income-we can't possibly have an economy that will grow faster than income growth, other than for a temporary boost from credit expansion, and that is not happening.

    Credit growth is very limited for the consumer. If we look at consumer credit outstanding, although those numbers have gained since the panic of 2008, all the growth there has been in federally owned student loans, not in the type of consumer loans that would usually go into buying washers and dryers and such. Basically, the consumer's liquidity has been constrained. We are also seeing consumer confidence and sentiment numbers that are typical of a recession, not an economic boom. We have a lack of income growth, a lack of adequate credit availability and, generally, a low level of confidence.

    Consider that GDP growth in Q3/14 adjusted for inflation was an annualized 3.9%, and 4.6% in Q2/14. That's two back-to-back quarters of roughly four percentage points. This is the strongest economy in over a decade if you believe the government's statistics, yet I'll challenge you to find someone who thinks that this is that good of an economy. It's just not there. There may be pockets of strength in Silicon Valley or such, but the average homeowner and the average consumer are not seeing it.

    TGR: If there are all of these negative signs going on, why are the GDP numbers so high?

    JW: When Lyndon Johnson was president, he would get to review the GDP numbers every quarter. If he didn't like them, he'd send them back to the Commerce Department and keep sending them back until the Commerce Department gave him what he wanted. We don't have anything quite that overt happening now, but the government understates inflation. The problem is if you use too low a rate of inflation when adjusting economic numbers for inflation, that tends to overstate economic growth. When there is a roughly 2% annual understatement of GDP inflation, it means that GDP is basically overstated by two percentage points. When we look at the current number, 4% annualized GDP growth, we're seeing year-to-year growth of 2.4%. So if we take 2% out of that, you're seeing 0.4% growth. That's negligible.

    As far as what happened in 2014, the economic data do not surprise me that much, because there are always problems with how it is reported. The ongoing problems with the economy continued. We did see a couple of flutters in the stock market. What did surprise me was the strength of the dollar. That's where the risks run for the immediate future, particularly into 2015.

    The dollar is unusually strong, the strongest it's been in some time. If we look at the factors that drive it, the dollar is very vulnerable. Right now, our economy purportedly is booming, and the rest of the world is in recession. So that, on the surface, would tend to result in a strong dollar. I'll contend, though, that our economic growth is not real. The numbers will weaken. Retail sales and industrial production actually have much higher credibility than the GDP in that we'll see indications there of renewed recession. We've already seen a sharp slowing so far in the data for Q4/14.

    TGR: How, in your view, did quantitative easing [QE] and tapering impact the dollar?

    JW: QE was a fraud in how it was put forth. The idea here is that the Federal Reserve was doing this to help the economy. But even as he was expanding QE, Fed Chairman Ben Bernanke explicitly expressed that there is very little the Fed can do to stimulate the economy at this point. The systemic financial panic of 2008 brought the financial system, particularly the banking system, to the brink of collapse. That's where it was headed. The Fed and the Treasury did whatever they had to do to prevent total collapse. They created whatever money they had to create. They lent whatever money they had to; they spent it; they bailed out whatever firms they had to; they guaranteed all deposits.

    When QE was introduced, the Fed flooded the banking system with cash. Normally, banks would take that money and put it into circulation. If they let it go into the normal flow of commerce, we would have had things pick up in lending, and that would have helped turn the economy around. That didn't happen. What the banks did was deposit the funds back into the Federal Reserve as excess reserves in the monetary base. It didn't help businesses at all. This policy was designed to help banking. That's the Fed's primary function in life, to keep the banking system afloat.

    Because of what happened during 2008, it wasn't really a good idea politically to say, "Hey, we're still bailing out the banking system." So the Fed cloaked this policy as an attempt to stimulate the economy. And as the economy remained weak, it would use the weak economy as political cover for increasing the QE. It was helping the banks, but it did nothing to help the domestic economy other than by preventing a complete collapse of the financial system.

    TGR: Is that why it didn't have the effect on the dollar that everyone was predicting?

    JW: It did have an effect on the dollar early on. Whenever there was a rumor that the Fed was going to have to ease more, the dollar would take a hit and gold would rally. When tapering was indicated, the dollar would rally and gold would sink. There was a very direct relationship there.

    Some months back, the economic numbers all of a sudden started to take off in a manner not seen in a decade, not supported by any underlying fundamentals. Then the Fed said it would cut back on its tapering and eliminate its purchases of new Treasury securities, which was seen as a positive for the dollar because it meant the Fed was going to shy away from further, open debasement of the dollar.

    But here's where the risk comes: The U.S. economy has not recovered. It's still in trouble. The numbers, as we move forward into 2015, are going to get much weaker. That's going to, again, increase the speculation of a QE4. That will all be very negative for the dollar and very positive for gold.

    Relative government stability is another big factor in a currency's value. Over the last year, we've seen the domestic political circumstances go from bad to worse. I think the political situation is going to continue to deteriorate.

    We can look at the domestic fiscal circumstances. Now, the cash-based federal deficit shrank this year to less than $0.5 trillion-supposedly good news, but what people don't seem to be thinking about is that the Fed actually monetized 80% of that deficit through quantitative easing. The U.S. government wasn't out there in the markets borrowing openly and honestly. Whatever it was borrowing was also being purchased and taken out of the market by the Fed.

    If we look at the annual deficit using generally accepted accounting principles and account for unfunded liabilities for programs such as Social Security, that deficit increases by about $6 trillion [$6T] per year. On an aggregate basis, including roughly $18T worth of gross federal debt, total federal obligations right now are up around $100T in net present value. That's what the government needs to cover its obligations. It doesn't have that and never will. What that means is the federal government does not have a sustainable financial future. That's the long-term fate of the system here.

    TGR: Do you think the dollar is in a bubble right now and is going to crash?

    JW: I guess you could call it a bubble. I do think it's going to crash. With that crash will come a big spike in oil prices, a big spike in gold and silver prices. The Fed is going to have to ease again. A weak economy means more stress on the banking system, and the Fed is always looking to prop up the banking system.

    What you have to keep in mind with inflation and deflation is that there are different ways of looking at them. I'm looking at inflation and deflation basically from the standpoint of consumer expenditures, what people see in the way of prices of what they're purchasing, as opposed to asset inflation or deflation, where we're looking at financial market values. We can also look at growth in the money supply as a measure of inflation and deflation. Money supply growth actually will start to pick up very sharply as the dollar comes under heavy selling pressure.

    There are some major problems with how inflation is viewed. I'm talking now about practical, day-to-day household operations. How much did it cost me to live last year? How much is it going to cost me to live same way this year? However much that number increases-the cost of maintaining a constant standard of living-is the rate of inflation as far as the average person is concerned. That is the rate of inflation to use for targeting income growth or investment return. The government no longer reports it quite that way; the CPI does not measure inflation from the standpoint of maintaining a constant standard of living, or even from the standpoint of reflecting out-of- pocket expenses.

    But central banks want to create inflation to prop up their economies and markets. Just blindly creating inflation, however, doesn't make any sense.

    The positive type of inflation is created by strong demand for products, and because of short supplies, prices rise, but production also will be increasing. That's how the system would normally adjust for it. In this scenario, people are employed, their salaries are increasing, and the economy is growing. The Fed can't create that kind of inflation, at present. They would like to, but they can't. The central banks can't create that type of inflation, certainly not by flooding the system with cheap money that's not being lent to the consumer. They can only create the type of inflation that is driven by currency weakness.

    I'm looking for the dollar to sell off sharply, actually suffer a massive decline, which, in turn, will be reflected in a very strong rise in commodity prices, pushing costs higher, pushing inflation higher, but not strengthening the economy. That's what the central banks are pushing for, which is nonsensical.

    TGR: I recently wrote an article based on comments from former Federal Reserve Chairman Alan Greenspan that he gave at the New Orleans Investment Conference. He denied that the Fed was responsible for the housing bubble and explained that bubbles are easy to see but difficult, if not impossible, to pinpoint when they will implode. Do you agree? What bubbles do you see out there?

    JW: Greenspan is a very interesting character. He has a wonderful vocabulary and was certainly a very influential politician and Fed chairman over the years, but what you just said is largely nonsense. In fact, you can make a strong case for laying the problems that we have right now in the lap of the former Fed chairman.

    There are two things at work here. One, starting about 1970, the U.S. embarked on all sorts of trade practices that encouraged sharp growth in the trade deficit and the weakening of the dollar. As the dollar fell and as domestic production increasingly moved offshore, higher-paying production jobs disappeared. If we look at the government's numbers on the inflation-adjusted income of production workers in the U.S., it is 10-15% below where it was in 1970, and it's been flat for the last couple of decades. This is where the problems developed with consumer income. We can't build wealth on producing hamburgers and providing services. We've become a service-based economy. That does not build wealth as does, let's say, manufacturing automobiles or tanks.

    When I talk about manufacturing, I'm not talking about having an assembly plant. I'm talking about actually having all the subcontractors that make the parts. That's disappeared, and that put the American consumer in a circumstance where he or she just could not support the economy. Alan Greenspan recognized that. So what he did was encourage debt expansion, particularly in areas such as home equity loans. And the debt expansion that followed was what provided the bulk of the growth in the U.S. economy for the decade before the panic in 2008.

    TGR: The housing bubble.

    JW: That was a deliberate policy decision at his end. Had the economy taken a hit much earlier, say back in the time of the 1987 stock market crash, there would have been a period of financial discomfort, but the system would have been cleansed of a lot of abuses that had built up over time, and we could have had positive growth going forward. What we did with the debt expansion was to borrow as much growth as we could from the future and pull it into the earlier periods. There had to be a day of reckoning there.

    TGR: Have we had that cleansing? Did 2008 get all of that out of the system?

    JW: No. All sorts of things are still at work there because the system was not allowed to collapse as it would have. As much as could be was pushed off into the future. We still don't have a healthy, sustainable system. The panic of 2008 is still with us; it's just been pushed a couple of years into the future. We're coming up on it again.

    But let me make one other point here because it's an important one regarding Mr. Greenspan's involvement. A lot of the bubble and its detrimental effects were created by all these derivative instruments-mortgage-backed securities and such-that were created as new investment vehicles and sold to the rest of the world. That area was highly touted by Alan Greenspan and by the Federal Reserve under his control as a way that the banks could spread risk. For example, insurance companies could take that risk by buying these derivative instruments. It was a way of distributing risk within the system.

    The U.S. central bank can be credited with both encouraging an extraordinary debt bubble and in creating and encouraging the derivative instruments that were used to build debt leverage on top of debt leverage that resulted in the collapse in 2008. The Fed and the federal government never addressed the core of the economy's problems, never addressed why is it suffering from a liquidity standpoint. What they did was look for how we could borrow economic growth from the future. They came up with some very creative ways of doing it. When you borrow things from the future, usually you have a period of payback. That's what we're seeing now. That's why we can't get the economy to grow.

    TGR: Can you give us a picture of what we can expect in 2015 and how we can prepare for it?

    JW: I'll give you a couple of things to look for in 2015. Fundamental economic activity as measured in areas such as retail sales, industrial production, housing starts, payroll numbers and the broadest measure of unemployment-all those numbers are going to deteriorate. The economy is going to head down as we get into reporting in early 2015. Along with that will come renewed expectations of action by the Federal Reserve to accommodate the financial system, particularly the banking system, and the combination of those factors will, I believe, help to trigger a massive decline in the U.S. dollar. As a result of that, we will see spikes in commodity prices, such as oil. We will see a flight to quality in areas such as the precious metals-gold and silver. We will see the stock market and the bond market generally suffer some real selling pressure.

    If interest rates go up, they would start to reflect in inflation numbers. Traditionally, long-term interest rates tend to move with inflation. You might see some upside movement there in the longer-term interest rates, which would depress the bond prices. A return to an accommodative mode for the Fed might rally stocks. But guess what? If we value those stocks in either inflation-adjusted dollars or in Swiss francs, we'll find that the real value of the domestic stock market will be in contraction.

    Even though the Dow could rally to new highs, I would shy away from stocks. I know gold and silver have taken tremendous hits in this last year, but I would suggest holding physical gold and silver as hedges against the loss of purchasing power in the U.S. dollar. If you can put your liquid assets into something like gold, which will preserve the purchasing power of those assets and continue to provide liquidity. Such an investment would likely help you to get through the inflation crisis and whatever crises follow that. When things settle down, you should still be able to function well, having maintained the purchasing power and liquidity of your assets and wealth.

    It's an extraordinary time. I did move my hyperinflation forecast from 2014 into 2015. But the dollar selling can start at any time, with little warning. And there are things that the central bank may do to try and prop up the dollar, but once heavy selling is in place, it's going to be a downhill run for the dollar.

    TGR: Thank you for sharing your insights with us.

    This interview was conducted by JT Long of The Gold Report and can be read in its entirety here.

    Walter J. "John" Williams has been a private consulting economist and a specialist in government economic reporting for more than 30 years. His economic consultancy is called Shadow Government Statistics [ShadowStats.com]. His early work in economic reporting led to front-page stories in The New York Times and Investor's Business Daily. He received a bachelor's degree in economics, cum laude, from Dartmouth College in 1971, and was awarded a master's degree in business administration from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee.
    2) John Williams: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Dec 17 2:31 PM | Link | Comment!
  • Be Bold And Seek The Sizzle, Says VSA Capital's Paul Renken

    It's time to be bold, says Paul Renken, senior geologist and analyst with London-based VSA Capital. He seeks the "sizzle," or the narrative, in mining equities because the sizzle moves the story. But Renken remains selective and likes to see a significant discovery or acquisition that provides a clear path to investor returns. In this interview with The Mining Report, he recommends a veritable laundry list of companies in numerous commodities operating around the world.

    The Mining Report: You're a survivor. Mining investors want to know what they will need to survive 2015. What's your message?

    Paul Renken: Always know how much you can afford to risk in any particular situation, but it's probably the time to be bold simply because the sector has done worse than anyone has expected over the last year or so. That is essentially forcing out the weak players.

    TMR: Weak players?

    PR: Weak players are those looking for a short-term turn in a particular stock in order to make a short-term gain. There just hasn't been a significant move upward in virtually any of the commodities. In fact, just the opposite has happened. We've had a significant selloff.

    TMR: How should investors play this market? Are you seeking specific situations across all commodities?

    PR: We're being quite selective. For instance, the difficulties in the iron ore market are widely known-iron ore just dipped below US$70/ton-but there are some specific circumstances that warrant a closer look, simply because they were hit early and had the opportunity to fall farther than their peers. The firm is not particularly bullish on iron ore going forward but we expect that the price will be somewhat higher next year, so there is going to be a modest recovery.

    TMR: Are other commodities showing favorable support levels in this market?

    PR: We think that there is going to be continued strength in diamonds and colored stones. That has been a good market this year for equity investors as auction prices have strengthened. The growth market is in Asia for polished stones, both colored and white stones, diamonds and colored gemstones like rubies and sapphires. And that seems to be continuing.

    Another commodity that we like here is lithium. The confirmation that Tesla Motors Inc. (NASDAQ:TSLA) will build the "Gigafactory" in Nevada definitely strengthened the outlook for lithium. And other automobile manufacturers are attempting to make electric and hybrid vehicles both popular and commercially profitable, too.

    TMR: Gemstones and lithium. Any others?

    PR: We also see some good support on a longer-term basis for tungsten, simply because the market hasn't been flooded with too much material, unlike what has happened in iron ore and oil.

    TMR: Please outline your investment thesis for junior mining companies in this market.

    PR: We want to see sizzle in the story. It could be a deeply discounted cash flow position that the company is either acquiring or that has been inappropriately discounted. Some investors are also looking for a dividend yield that's relatively secure even though the commodity that the company produces has witnessed some weakness. Another angle is a significant discovery or an acquisition that was made via exploration drilling through a deal. These kinds of sizzle will help move these stories because there are too many junior companies where the project is going to stay where it's at without something to sell it. You also have to have confidence that the story will come to fruition rather than just a blind punt on the gambling table.

    TMR: What are some telltale signs that something is a legitimate story?

    PR: One thing is a clear timeline that is achievable for what the company intends to accomplish. That could be how long it will take to get a permit or how much money it will take to finance a portion of the exploration or development. Those two things let us know that management has a good understanding of the project as it develops. Another one is three-dimensional evidence that there is continuity of high-grade mineralization. An additional good sign is a simple and clear path to how a potential investor would make money because complications essentially make stories much more difficult to believe.

    TMR: How many mistakes are you willing to forgive before you sell?

    PR: If I were an investor in a project, I would have a clear vision as to how much I was prepared to tolerate. I could probably tolerate only one or two errors. But if I owned shares and it becomes clear that the reason I initially invested is not going to happen right away, I would be prepared to exit a position after the first mistake.

    TMR: Are you more willing to discount delays in a market where money is difficult to find?

    PR: The short answer is no. The reason is that most investors are not solely invested in natural resources. They have more than enough other opportunities to risk their capital. That's part of the problem with the sector. Equity performance has been so poor across natural resources for so long that the money has exited to less risky places.

    TMR: Let's start with gold. Gold has bounced up from its bottom of US$1,140/ounce [US$1,140/oz] in early November to as high as a little above $1,230/oz in early December. Please give us your thoughts on gold's fundamentals and how those numbers will influence its performance in 2015?

    PR: At the beginning of the year VSA Capital thought that gold would spend some significant time between US$1,100/oz and US$1,200/oz, but not below that level. We're still working on our forecast for 2015; we expect some modest improvement, but we don't see any big move to the upside-given what we see in current economic and trading activity. There is, however, a tremendous sense of concern-I wouldn't call it foreboding but there is concern-about what is going to happen when the U.S. starts to implement rising interest rates and, in particular, what will happen with the bond market because institutional money is heavily vested there.

    By all measurements the bond market is significantly stretched. If everyone decides to leave bonds and head for the exit at the same time, not everybody is going to get out without significant losses. The U.S. Treasury market is so big and liquid that most of the money will go there, but some of it could go into gold and silver. Even small percentages of the bond market money moving to gold and silver would cause a significant price jump.

    TMR: What are some gold-focused equities that you're following?

    PR: We follow quite a few gold stocks for various reasons. Randgold Resources Ltd. (NASDAQ:GOLD) is a producing stock that is considered a bellwether for gold. It only produces gold, so it's a clean measurement as to the equity movement with gold prices. It's widely followed.

    TMR: Will silver rebound in 2015?

    PR: Silver has been anything but steady over the last couple of months, with a rather drafty fall from US$21/oz all the way down to US$14/oz. It is now around US$17/oz. The real disappointment is that worldwide industrial manufacturing activity is not stronger because silver is largely an industrial metal. The silver-gold ratio is into the 70s-something we haven't seen for years. Silver should outperform gold if manufacturing activity improves because the uptake on ounces produced would be far better. I expect silver to be more volatile than gold as it moves into the $19-21/oz range again next year. That would be a 20% gain.

    TMR: What are some silver-focused equities VSA is tracking?

    PR: We regularly follow Fresnillo Plc (OTCPK:FNLPF) [FRES:LSE]. It's one of the stocks that institutions tend to have in their portfolios, particularly Mexican institutions. By the same token, it's also a stock with consistently falling grades in its overall production profile. We want to see how that affects its margins.

    Another stock that we follow quite closely is Endeavour Silver Corp. (NYSE:EXK). It has a $280M market cap but has witnessed declining margins in 2014 as a result of the declining silver price. It is well-run company, though, so we think those margins will improve.

    Also, Fortuna Silver Mines Inc. (NYSE:FSM) has outperformed its production guidance in the two recent quarters. We think investors should take a look at it.

    TMR: What's the sizzle with Fortuna?

    PR: It caught my attention because it exceeded its production guidance on its operations, as well as its forecast margins between cash costs and all-in costs. We want to see companies that are improving their economic fundamentals on a production basis and don't have to worry about making those improvements by selling assets.

    TMR: When we talked with you in the summer, we discussed tungsten and its market fundamentals. You said earlier that you see modest long-term growth in tungsten prices.

    PR: Earlier this year the World Trade Organization ruled against China's export tariffs on molybdenum and tungsten, and we are uncertain how the Chinese will react. Some commodities like tungsten are highly dependent on one particular country's production or export activity. In this case, it's China. China imposed tariffs because it wants to make sure that it has as much tungsten and molybdenum as necessary to support domestic manufacturing. We doubt China would flood the market with tungsten as it did in the 1970s because the market dynamics are very different. The current ammonium paratungstate [APT] price is around US$350/metric tonne unit [$350/Mtu], which is fair. We think that the tungsten price overall is going to stay steady, if not rise in tandem with inflation in 2015.

    TMR: Can most of the suppliers make money at $350/Mtu?

    PR: Yes, most of the established suppliers can make money at that price.

    TMR: And, finally, let's talk about lithium. Should investors buy into the hype surrounding the lithium necessary for the growing market for lithium ion batteries?

    PR: There is an awful lot of hype and the hype has gotten ahead of what is actually happening. We recently published a lithium piece that determined that the economies of scale would finally develop in the electric vehicle market when at least 0.5-1M vehicles were produced per annum. Tesla is building its Gigafactory in Nevada to produce enough batteries for 0.5M vehicles, so it is definitely trying to produce enough batteries for the commercial electric vehicle market to take off. The Chinese have been locking up lithium deposits in order to be sure that if the market does reach critical mass, it will be the Chinese automakers that have secure lithium supplies for these batteries.

    TMR: Are you following some graphite companies?

    PR: Yes. One is producing now out of Madagascar on a small scale, StratMin Global Resources Plc [STGR:AIM]. It has a £7M market cap.

    TMR: What's one thing we should watch for in 2015?

    PR: You can be quite certain that commodity prices are going to be more volatile than they have been this year, particularly if we start seeing changes in U.S. interest rates, because institutional money will look for places to allocate money. We're talking about billions and billions of dollars moving from one asset class into another.

    TMR: Thank you for your insights, Paul.

    This interview was conducted by Brian Sylvester of The Mining Report and can be read in its entirety here.

    Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the Western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the U.K., he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fortuna Silver Mines Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Paul Renken: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship, or had in the past 12 months, with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Dec 16 4:09 PM | Link | Comment!
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